Land-in-Lieu Financing for a Mobile Home
Today we will discuss how home buyers can use land as the down payment on their mobile home, an option referred to as Land-in-Lieu in the mobile home industry.
In the last couple of blogs we have gone over options for home buyers who do not yet own land and want to finance both their land and home into one home loan (read more on those options here and here).
But for those who already own their land, the land-in-lieu option can be very appealing as it eliminates the need to produce a large cash down payment.
The Purpose of a Down Payment
It’s pretty common knowledge that when you buy a home, you’ll need a down payment. Depending on a number of co-dependent factors (credit history, income, loan amount, etc.) a lender will determine the total down payment required.
It will typically fall between 5% and 10% of the total home price and additional land improvements being rolled into the loan.
But why does the bank ask for a down payment in the first place?
Down payment is the proof of your personal investment into the large purchase you are making. It would be easy for anyone to ask for a loan with good income and credit history if they didn’t have to actually invest any of their own money into the purchase themselves.
But because of the requirement of a personal investment, not only does the bank have something to lose in the case of foreclosure, but the home-owner does as well—the thousands of dollars produced when the home was first purchased.
With land-in-lieu financing, instead of your personal investment in the loan being a cash lump sum, you are instead investing with your land.
The Process of Using Land as Down Payment
Many of the steps and paperwork needed in financing a land/home loan are also part of the land-in-lieu process.
As with any loan, the process begins with a free credit application. Your housing consultant will guide you through this, helping you format the application to offer your land in lieu of a down payment.
Once the approval comes back, so will the list of all the documentation needed to proceed to the closing table. The bank will ask for items such as the deed to the land to prove ownership, a recent tax document that shows the tax appraised value, paystubs, W-2’s, and other bank issued forms and waivers.
Once these documents have been processed and cleared by the lender, it will be time to order both the appraisal on the land and what is referred to as a “title search”.
A title company will research the property and property owners to ensure there are no outstanding liens or judgements on the land for unpaid taxes. If unpaid taxes are found, they will need to be paid at closing with cash from the borrower.
If the borrower cannot afford to pay off the outstanding taxes, the land will not be usable as a down payment any longer and may cause the home buyer to lose the approval on their loan.
Oftentimes, when a land-owner has a common name, their title search can show outstanding taxes that are someone else’s. In these instances, a “not the same person” affidavit is signed and the customer’s title will be cleared of those liens.
The Downside of Land-in-Lieu
One thing to keep in mind if choosing to offer your land as a down payment when buying a mobile home, is that unlike in a chattel loan (financing the home only), the lender will, in the event of foreclosure, own both the land and home together.
Because the land is the personal investment, or collateral, used in procuring the loan, it is important to understand that the lien will be on the home and property together for the duration of the loan.
This option can be very beneficial for home buyers who can’t produce the money needed for the down payment on the purchase of their mobile home but they must also understand the potential risk of losing not just their home, but the full investment of their land as well.
Another potential downside is having your land appraise for less than what the bank requires for a down payment. In this case you would need to produce the difference in cash and would have both your land and cash invested into the mobile home loan.
On the flipside, however, land can also be worth more than the base 5% requirement and can allow the home buyer a higher loan approval, allowing them to finance costly land improvements (utilities, decks, skirting) into the loan, that they may have otherwise been unable to afford.
As with every loan, there are pros and cons to be weighed, and it’s important to understand the full scope of the commitment you are making as a home buyer.
An experienced housing consultant with your future success as a home-owner in mind will be able to help you narrow down your choices and help you proceed with the loan that makes the most short and long-term financial sense for your family.